Google?? much-anticipated fourth-quarter earnings are out, and it appears to have beat expectations that were muted thanks to the struggling economy and Google?? own recent cost-cutting moves.
Google earned a profit of $5.10, easily beating the $4.96 a share Wall Street was expecting, on sales of $4.2 billion, which also beat forecasts of $4.12 billion by a hair. The full release is pasted below. Although Google?? comments shortly on the outlook for 2009 will be what really matters, investors are already bidding up the stock in after-hours trading by about 4% 2%.
UPDATE: Now, around 6 p.m. Pacific, after-hours shares are down almost 3%. Not sure why the switch, but clearly investors are taking a second look. Sandeep Aggarwal of Collins Stewart thinks it?? mostly the employee option repricing, described in more detail below, that will mean a hefty charge to earnings in coming quarters. Investors tend not to like this, because essentially employees are getting a break on their shares that investors don?? get. And as always, Google provided no guidance on future earnings, so investors may just be cautious.
UPDATE 2: Well, so much for that sentiment switch. Shares are up about 5% 8% on Friday morning closed up 6% on Jan. 23, on a flattish day for the overall market. I?? betting that investors figured Google, at least for now, still looks like a better place to put their money than a lot of other companies.
The money quotes from CEO Eric Schmidt sound relatively positive:
??oogle performed well in the fourth quarter, despite an increasingly difficult economic environment. Search query growth was strong, revenues were up in most verticals, and we successfully contained costs. It?? unclear how long the global downturn will last, but our focus remains on the long term, and we??l continue to invest in Google?? core search and ads business as well as in strategic growth areas such as display, mobile, and enterprise.?/p>
Clearly, Google’s cost cuts helped the bottom line, as it hired only 99 net people in the quarter, far below the 519 hired in the third quarter. It’s also giving them a break in the form of the right to exchange their stock options, many of which are valued at less than Google’s share price today, for options priced closer to the current value, providing more upside. That should help retain people whose Google riches have vanished in the past year, as Google’s stock fell by more than half.
Google’s net profit actually fell steeply, from $1.2 billion a year ago to $382 million. It appears a big reason for that is not ongoing operations but recording $1.1 billion in non-cash investment impairment charges for its stakes in AOL and Clearwire, and payments for settling lawsuits by the Authors Guild and the Association for American Publishers.
Here’s my liveblog of the earnings call, which has just begun. I’ll keep updating from the bottom:
Eric Schmidt comes on. “We had a strong quarter.” Strong search query growth year over year. Tight control on costs: “We have the formula down now.”
Says search ads are the most effective advertising today.
Took significant writedowns on AOL and Clearwire.
Economy: “In some ways, Q4 was the easy part. Now, we’re in a situation where last quarter we were in uncharted territory. We don’t know how long this period will last. We’re certainly prepared to get through this no problem.”
Confident long-term because of fundamental trends. “We’re in this for the long haul.”
At least 85% of employees have at least some shares underwater. So they’re offering an exchange. Employees have to give up 12 months of vesting—a good deal for shareholders.”
Schmidt says the core focus remains search ads, though he also says cloud computing is now mainstream, implying Google will keep pushing on its online software offerings.
CFO Patrick Pichette comes on: Gross revenue up 18%, to $5.07 billion. AdSense up 4% from a year ago, to $1.7 billion. Global aggregate click growth up 18% from a year ago globally. U.S. up 13% from a year ago and 5% from the third quarter. UK was soft, though, down 1%.
Expenses: Traffic acquisition costs were down to 27% of revenues, from 28% in the third quarter.
Currency worked against Google again—$334 million negative impact on revenue compared with the third quarter.
$368 million in capital spending—mostly data centers, server production and the like.
On the option exchange program: represents 3% of outstanding shares. Charge will be about $460 million over the next five years, though much of those charges could come sooner if employees take Google up on the offer.
“Our core business continues to demonstrate strength, this despite a challenging economic environment.”
Now products chief Jonathan Rosenberg comes on: Launched over 350 search quality improvements in 2008—no lying back on this, clearly.
Blending books into search results looks especially promising with the settlement of the lawsuits.
Search coverage, the number of results that run ads, is up from a year ago, but still only to what it was in early 2008.
Says there’s a lot of opportunity to sell more search ads, since advertisers haven’t maxed out their search ad budgets, if Google can deliver more clicks.
Innovation continues—he mentions Google’s browser Chrome as a prime example.
Now back to Pichette with the analyst Q&A:
* Why not more experimentation with new video formats? Schmidt: Three new ad formats in the last 4-5 months. “Each of them is having some traction. But we’ve not found one single format that drives wild results.”
* What happened to revenue per click? And partner revenue growth rate is much lower than Google’s own growth rate, so what about that? Pichette: The AdSense revenue was weaker, but AdSense for Content had a relatively strong quarter. AdSense for Search (the other part of AdSense, its program for placing Google ads on other Web sites)—Google cleaned out pure arbitrage plays, that is, sites that exist only to run Google ads, with little original content—that reduced revenues there, but better for users. Sales chief Omid Kordestani: Doesn’t break out cost per click on AdSense.
* Impact of foreign exchange: Pichette says the dollar was very volatile in the fourth quarter, so hard to hedge through all those changes. Will hedge NOT for revenue, but for profit.
* How view capital spending? Pichette: “We are investing.” But benefiting from economies of scale and greater efficiencies of its infrastructure. And big data centers can skew costs quarter-to-quarter because they cost so much.
* How flexible is the cost structure? Pichette: The real issue is we’re a labor-intensive business. But we have a lot of flexibility within our model. There is no doubt that in the mindset of the company, … we are managing the business for the long term.
* How much more opportunity is there for cutting costs? Pichette: “The mindset of the company is to be a growth company. We’re really focused on growing this company.” “We’re just managing responsibly given the environment.”
* On cost per click, how much can they go down given the recession?
Rosenberg: Doesn’t think there would be a deflationary spiral on cost per click (that is, what advertisers pay for each click on their ads).
* On the distribution deals like Dell and Verizon, why didn’t you win those deals and has your philosophy changed on that? Kordestani: We do very sophisticated business modeling on these deals and ultimately we’re only willing to pay so much for these. We have alternative opportunities for distribution.
* On ad coverage: Rosenberg: We don’t know what the optimal coverage is. We’d really like to show fewer ads on the queries that don’t really warrant them. And we’d like to show fewer (but higher-)quality ads on queries that do warrant them.
* How did marketers change their search spend stragegies? Kordestani: Rationally—reduced bids rather than just dropping out. They’ll take more clicks if we can deliver them.
* How did midsized marketers act in the fourth quarter? Kordestani: seeing robustness among smaller customers. But visibility not clear.
* Last question: What’s the strategy on display ads with DoubleClick and YouTube? Kordestani says they’re doing well but doesn’t offer much color.
And that’s it. There will be a second Q&A call in at 3 p.m. Pacific. Probably can’t liveblog that one since I have to write an actual story, but you can tune in here.
Here's the release:
MOUNTAIN VIEW, Calif.--(BUSINESS WIRE)--Google Inc. (NASDAQ:GOOG - News) today announced financial results for the quarter and for the fiscal year ended December 31, 2008.
“Google performed well in the fourth quarter, despite an increasingly difficult economic environment. Search query growth was strong, revenues were up in most verticals, and we successfully contained costs,” said Eric Schmidt, CEO of Google. “It's unclear how long the global downturn will last, but our focus remains on the long term, and we'll continue to invest in Google's core search and ads business as well as in strategic growth areas such as display, mobile, and enterprise.”
Google also announced today that it is planning to offer employees a voluntary, one-for-one stock option exchange. This program, intended to create more incentives for employees to remain at Google and contribute to achieving its business objectives, is currently scheduled to begin on January 29, 2009 and end on March 3, 2009, unless Google is required or opts to extend the offer period to a later date. Please see the section "Employee Stock Option Exchange" below for more details.
Q4 Financial Summary
Google reported revenues of $5.70 billion for the quarter ended December 31, 2008, an increase of 18% compared to the fourth quarter of 2007 and an increase of 3% compared to the third quarter of 2008. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs (TAC). In the fourth quarter of 2008, TAC totaled $1.48 billion, or 27% of advertising revenues.
Google reports operating income, net income, and earnings per share (EPS) on a GAAP and non-GAAP basis. The non-GAAP measures, as well as free cash flow, an alternative non-GAAP measure of liquidity, are described below and are reconciled to the corresponding GAAP measures in the accompanying financial tables.
* GAAP operating income for the fourth quarter of 2008 was $1.86 billion, or 33% of revenues. This compares to GAAP operating income of $1.65 billion, or 30% of revenues, in the third quarter of 2008. Non-GAAP operating income in the fourth quarter of 2008 was $2.15 billion, or 38% of revenues. This compares to non-GAAP operating income of $2.02 billion, or 37% of revenues, in the third quarter of 2008.
* GAAP net income for the fourth quarter of 2008 was $382 million as compared to $1.29 billion in the third quarter of 2008. Non-GAAP net income in the fourth quarter of 2008 was $1.62 billion, compared to $1.56 billion in the third quarter of 2008.
* GAAP EPS for the fourth quarter of 2008 was $1.21 on 317 million diluted shares outstanding, compared to $4.06 for the third quarter of 2008 on 318 million diluted shares outstanding. Non-GAAP EPS in the fourth quarter of 2008 was $5.10, compared to $4.92 in the third quarter of 2008.
* Non-GAAP operating income and non-GAAP operating margin exclude the expenses related to stock-based compensation (SBC) and the settlement agreement with the Authors Guild and the Association of American Publishers (AAP). Non-GAAP effective tax rate, non-GAAP net income, and non-GAAP EPS exclude the expenses and tax benefits related to SBC, the settlement agreement with the Authors Guild and the AAP and the non-cash impairment charges primarily related to our investments in AOL and Clearwire. In the fourth quarter of 2008, the charge related to SBC was $286 million as compared to $280 million in the third quarter of 2008. Also, in the fourth quarter of 2008, we recognized $1.09 billion in asset impairment charges related primarily to our investments in AOL and Clearwire. In the third quarter of 2008, we recognized $95 million of expense related to the settlement agreement with the Authors Guild and the AAP. The tax benefit related to SBC was $65 million in the fourth quarter of 2008 and $63 million in the third quarter of 2008. The tax benefit related to the impairment charges was $82 million in the fourth quarter of 2008. The tax benefit related to the settlement agreement was $39 million in the third quarter of 2008. Reconciliations of non-GAAP measures to GAAP operating income, operating margin, effective tax rate, net income, and EPS are included at the end of this release.
Q4 Financial Highlights
Revenues – Google reported revenues of $5.70 billion in the fourth quarter of 2008, representing an 18% increase over fourth quarter 2007 revenues of $4.83 billion and a 3% increase over third quarter 2008 revenues of $5.54 billion. Google reports its revenues, consistent with GAAP, on a gross basis without deducting TAC.
Google Sites Revenues - Google-owned sites generated revenues of $3.81 billion, or 67% of total revenues, in the fourth quarter of 2008. This represents a 22% increase over fourth quarter 2007 revenues of $3.12 billion and a 4% increase over third quarter 2008 revenues of $3.67 billion.
Google Network Revenues - Google’s partner sites generated revenues, through AdSense programs, of $1.69 billion, or 30% of total revenues, in the fourth quarter of 2008. This represents a 4% increase over fourth quarter 2007 network revenues of $1.64 billion and a 1% increase over third quarter 2008 network revenues of $1.68 billion.
International Revenues - Revenues from outside of the United States totaled $2.86 billion, representing 50% of total revenues in the fourth quarter of 2008, compared to 48% in the fourth quarter of 2007 and 51% in the third quarter of 2008. Had foreign exchange rates remained constant from the third quarter of 2008 through the fourth quarter of 2008, our revenues in the fourth quarter of 2008 would have been $334 million higher. Had foreign exchange rates remained constant from the fourth quarter of 2007 through the fourth quarter of 2008, our revenues in the fourth quarter of 2008 would have been $266 million higher.
Revenues from the United Kingdom totaled $685 million, representing 12% of revenue in the fourth quarter of 2008, compared to 14% in the fourth quarter of 2007 and 14% in the third quarter of 2008.
In the fourth quarter, we recognized a benefit of $129 million to revenue through our foreign exchange risk management program.
Paid Clicks – Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our AdSense partners, increased approximately 18% over the fourth quarter of 2007 and increased approximately 10% over the third quarter of 2008.
TAC - Traffic Acquisition Costs, the portion of revenues shared with Google’s partners, decreased to $1.48 billion in the fourth quarter of 2008. This compares to TAC of $1.50 billion in the third quarter of 2008. TAC as a percentage of advertising revenues was 27% in the fourth quarter, compared to 28% in the third quarter of 2008.
The majority of TAC expense is related to amounts ultimately paid to our AdSense partners, which totaled $1.29 billion in the fourth quarter of 2008. TAC is also related to amounts ultimately paid to certain distribution partners and others who direct traffic to our website, which totaled $190 million in the fourth quarter of 2008.
Other Cost of Revenues - Other cost of revenues, which is comprised primarily of data center operational expenses, amortization of intangible assets, content acquisition costs as well as credit card processing charges, increased to $707 million, or 12% of revenues, in the fourth quarter of 2008, compared to $678 million, or 12% of revenues, in the third quarter of 2008.
Operating Expenses - Operating expenses, other than cost of revenues, were $1.65 billion in the fourth quarter of 2008, or 29% of revenues, compared to $1.72 billion in the third quarter of 2008, or 31% of revenues. The operating expenses in the fourth quarter of 2008 included $890 million in payroll-related and facilities expenses, compared to $859 million in the third quarter of 2008.
Stock-Based Compensation (SBC) – In the fourth quarter of 2008, the total charge related to SBC was $286 million as compared to $280 million in the third quarter of 2008.
Employee Stock Option Exchange - Our Board of Directors has approved an exchange offer to allow employees the opportunity to exchange all or a portion of their existing stock options for the same number of new options. This program is currently scheduled to commence on January 29, 2009 and end on March 3, 2009 at 6:00 a.m. Pacific Time, unless Google is required or opts to extend the offer period to a later date. Currently, we expect that new options will have an exercise price equal to the closing price per share of our common stock on March 2, 2009 and that stock options with exercise prices above this closing price will be eligible for exchange, but this may change. Generally, all employees with options are eligible to participate in the program (Eric Schmidt, Sergey Brin, and Larry Page do not hold options).
The number of Google shares subject to outstanding options will not change as a result of the exchange offer. We have designed the program so that new options issued as part of this exchange offer will be subject to a new vesting schedule which adds 12 months to the original applicable vesting dates. In addition, new options will vest no sooner than 6 months after the close of the offer period. The expiration dates of the new options will remain the same as the expiration dates of the options being exchanged.
We expect to take a modification charge estimated to be $460 million over the vesting periods of the new options. These vesting periods range from six months to approximately five years. Assuming the offer proceeds according to our planned timeline, this modification charge will be recorded as additional stock based compensation beginning in the first quarter of 2009. This estimate assumes an exchange price of approximately $300 and that all eligible underwater options will be exchanged under the program. As a result, the actual amount of the modification charge is likely to change.
We currently estimate stock-based compensation charges for grants to employees prior to January 1, 2009 to be approximately $1.04 billion for 2009. This estimate does not include expenses to be recognized related to employee stock awards that are granted after January 1, 2009 or non-employee stock awards that have been or may be granted. It also does not include the estimated $460 million modification charge related to our employee stock option exchange.
Operating Income - GAAP operating income in the fourth quarter of 2008 was $1.86 billion, or 33% of revenues. This compares to GAAP operating income of $1.65 billion, or 30% of revenues, in the third quarter of 2008. Non-GAAP operating income in the fourth quarter of 2008 was $2.15 billion, or 38% of revenues. This compares to non-GAAP operating income of $2.02 billion, or 37% of revenues, in the third quarter of 2008.
Impairment on Equity Investments - We have determined that certain of our assets are impaired and require us to recognize non-cash impairment charges related to those investments. In the fourth quarter of 2008, the impairment charge on these ass